Is buying a home a bad investment?

I have been a lender for many years and I  have always told everyone that buying a home is better than renting. I still agree with this because I have rented and now own. Now when it comes to being a bad investment, I don’t think most realize what I am about to discuss. I was visiting with a gentleman whom at the time was not my stock broker but my friend was using him for money management. I was in his office and he did an analogy of how a home is a bad investment.  Here is what he said…… You buy a home usually for what the house is worth. The average interest rate is 6%. If you are lucky the value of your home will increase by 3% every year. You pay taxes and insurance on the home and inflation is typically 3% per year. So if you take in account the cost to maintain a home, inflation at the rate of 3% you have a bad investment. Why, because if you do the math you are in the red. This is the case with most home owners. So you are probably scratching your head asking when a home could possible be a good investment? Well here is an example of how a home might be a good investment.  You meet with a realtor and start looking for a home. You mention to the realtor that you are looking for a home with at least 20% equity in the home or you have no interest in buying the home. In this case your purchase could be a good real estate investment. Make sure you take into account declining real estate markets. This is going on everywhere. So if you find a home and get an accepted contract on that home for at least 20% less of its appraised value you could have a good investment. In most instances this is hard to find or is very competitive.

I don’t want to kill the American dream, but buying a home can be a bad investment after you take in account inflation, taxes, home owners insurance, loan interest rate, and the cost of home maintenance. I personally would rather own, but make sure you are clear on the factors discussed in this article before buying or you could end up with a money pit.

Author: Mike Clover

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